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HSBC (LSE: HSBA ) has been an unpleasant experience in the middle FTSE 100 bank shares this year. Its 12.3% gain pales in comparison to the monster’s rise NatWest (+66.1%) and Barclays (+56.6%).
Yet at 713p, HSBC’s share price is still close to a six-year high. So shareholders can’t complain too much.
A double-edged sword
To invest in HSBC, you have to be bullish on Asia (HSBC stands for Hongkong and Shanghai Banking Corporation, after all). This region generates about half of the bank’s revenue and more than half of its profits.
This year, it has more than doubled its Canadian business through sales and acquisitions CitigroupThe stage of wealth management in China.
However, in recent times, this focus on the world’s fastest growing region has become a double-edged sword. China’s economy has struggled to return to robust growth after the pandemic, and its construction sector has been in crisis for what seems like an eternity.
Weak Western economies have also impacted those in Asia by reducing export demand.
Looking ahead, US-China relations could continue to sour, giving the bank more political headaches to deal with. China’s economy, plagued by a rapidly growing population and high youth unemployment, may be set for slower growth than in the past. And it wouldn’t be good for HSBC.
High salaries
In Q3, the bank’s pre-tax profit rose 9.9% year-on-year to $8.48bn, smashing expectations for $7.6bn. But the record profits it and other lenders have been reporting do not look sustainable as interest rates fall. Therefore, the income of this company has probably increased significantly.
The good news here is that the market already knows this and the stock is probably priced accordingly. It trades at a forward-earnings ratio of 7.5 and a price-to-book ratio of 0.97.
The latter indicates that investors are currently paying less than the book value of the bank’s assets. And that rating is a discount to larger US peers.
Meanwhile, the dividend yield is 6.8%, higher than other bank stocks in the FTSE 100. Couple this with HSBC’s massive share buyback (another $3bn recently announced), and I think the stock is good value. Even though I’m six years older, I wouldn’t go so far as to say it’s an absolute steal.
It is still doing well in the Asian economy
Because of its high yield, I have HSBC in my share portfolio. But I also like its focus on Asia. Longer term, I still think that fast growing economies like India and China should lead to strong bank balances.
In addition, the company’s increased focus on wealth management could be very profitable. There was strong growth in wealth management fees in Q3, and this tends to be less sensitive to interest rate changes.
By 2030, Asia’s middle class is expected to grow to more than 1bn people, representing almost two-thirds of the world’s middle class. This means there is a growing pie for HSBC to get its fingers on.
So, I’m happy to have the stock in my portfolio for the long term. If it sinks in the coming months as interest rates are cut, then I will complete my holding.
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